Shallow-loss programs could leave taxpayers in deep trouble

Imagine what would have happened if, at the peak of the housing bubble in 2006, Congress had passed a law guaranteeing that all homeowners could sell their property at close to its record price for the next five years, regardless of market conditions. In the wake of the housing bust, many homeowners would have been ecstatic about the program, but it would clearly have been outrageously expensive and unfair for taxpayers.

Yet this is effectively what Congress is gearing up to do for farmers by expanding so-called shallow-loss programs. While promising to do away with about $5 billion a year in direct subsidies — which even many farm lobbies know are no longer politically viable — advocates of shallow-loss programs are pushing them as essential emergency relief that is needed to protect America’s food supply.

But shallow-loss programs are not really an essential safety net. They consist of a tangled web of distortions that could end up funneling even more than $5 billion a year to the agricultural sector that, for the most part, would end up in the hands of a relatively small group of wealthy farmers. A shallow-loss program would also generate serious moral hazard incentives, distort planting decisions and damage our trade relations, and it could leave taxpayers on the hook for more than $60 billion over the next five years. No other business lobby in America would dare to ask Congress to effectively guarantee — at public expense — that industry revenues will never fall below 90% of record levels. Yet the farm lobby calls it “reform.”

In a just-released study for the American Enterprise Institute that we co-authored with Bruce Babcock, we performed an extensive analysis of the costs that shallow-loss programs are likely to impose based on various market scenarios. If prices for major commodities like corn, wheat, soybeans and cotton remain at or close to their current near-record levels, then, depending on how the shallow-loss program is structured, taxpayer costs will be around $3 billion a year. However, if prices return to more normal levels, then the taxpayer costs of the shallow-loss program will soar well above the current $5 billion in outlays on direct payments. For example, the shallow-loss program currently being proposed by the Senate Agriculture Committee could cost taxpayers as much as $7.4 billion if crop prices return to their average levels over the past 15 years.

A closer look at the farm lobby’s rationale for shallow-loss programs demonstrates that the programs are a solution to a problem that does not exist. Advocates stress that legislation is needed to protect farmers from sudden drops in prices which, the lobbies claim, would immediately create such dire financial conditions that the agricultural sector would be eviscerated. Leaving aside the fact that all businesses must face market swings, the agricultural sector is, from a financial perspective, better positioned than almost any other sector of the economy to handle year-to-year variations in revenues and costs.

Consider the following facts: The current debt-to-asset ratio in the agricultural sector is less than 9 percent, and has been declining steadily over the past decade. And farms fail at a rate of less than one in 200 a year. Moreover, the USDA estimates that the agricultural sector is currently using only about one-third of its capacity to comfortably carry debt. Farms are exceptionally well positioned to handle market fluctuations and, moreover, most of them carry extensive heavily subsidized federal crop insurance protection against farm-specific losses (the federal government effectively pays about 70 percent of the total cost of each farm’s crop insurance policy).